China’s New Courtship in South Sudan

Africa Report N°1864 Apr 2012

EXECUTIVE SUMMARY AND RECOMMENDATIONS

In the wake of Sudan’s partition, Beijing has accelerated a re-orientation of its engagement in the resulting two states, most significantly through a new courtship in Juba. China’s historical support for Khartoum left a sour legacy in the South, but the potential for mutual economic benefit means a new chapter in bilateral relations is now being written. Balancing new friends in Juba with old friends in Khartoum, however, has proven a delicate dance. China has been drawn into a high-stakes oil crisis between the two, the consequences of which may temper an otherwise rapidly expanding relationship with Juba. A sustainable solution to the crisis cannot be achieved in isolation; North-South stability, mutual economic viability and the security of Chinese interests will also depend on answers to other unresolved political and security issues, including in Sudan’s marginalised peripheries. The future of Beijing’s dual engagement, and the kind of relationship that emerges in the South, will depend in part on how the oil standoff – and this broader reform agenda – are confronted.

As South Sudan prepared for its 2011 self-determination referendum, China recognised the increasing inevitability of independence. Eager to maintain stable relationships and the continuity of its oil investments – now situated primarily in the South – its stance evolved to reflect changing political realities. Beijing is keen to preserve and expand its footprint in South Sudan’s oil sector, but Chinese companies are also flocking to other sectors, above all to build infrastructure in a country that has almost none.

China’s cultivation of new political and economic relations has been most visible in the surge of bilateral exchanges with Juba over the last year, which is expected to be capped in the coming weeks by President Salva Kiir’s first visit to Beijing as head of state. As they seek to build bridges with the South, the Chinese are keen to draw comparisons with their own experience of economic transformation and rapid rural development, as well as to emphasise a sense of shared historical experience at the hands of imperial powers.

South Sudan is very much “open for business”, actively seeking foreign direct investment from West, East, and everywhere in between. Historical ties may be strongest with the West, but Juba has made clear that if the Chinese are first to come and partner in developing the new nation, they will not hesitate to welcome them. Furthermore, China’s “no strings attached” political approach and economic cooperation model is as attractive in Juba as it has proven elsewhere on the continent, not least in resource-rich states eager to develop fast.

As Juba opens up to new investment, it should take two critical factors into consideration. First are potential correlations between the economic partnerships it forges, the character of the state that emerges and its foreign policy. While it hopes to remain politically aligned with the West, time will tell whether expanding economic partnerships with China or others will have a gravitational effect. For now, it wants to welcome, and leverage, the interest of all actors.

Secondly, in the midst of a mounting budget crisis, Juba must consider how to secure and direct investment so as to best serve its development agenda, calm its own domestic insecurity and prevent even greater state fragility. It must actively shape new economic relationships rather than become a passive recipient of foreign-authored investment. Given limited government capacity and an untested legislative framework, its economic planners must take care to harness such investment for its own benefit, lest Africa’s newest state be overrun in a resource scramble.

The number of Chinese nationals and commercial actors in Juba has spiked dramatically in the nine months since independence. Beyond oil, Chinese companies are most interested in infrastructure, and South Sudan needs everything: roads, bridges, telecommunications, power plants, electricity grids, schools, hospitals, municipal buildings, water treatment facilities, dams and irrigation systems and new oil infrastructure. Companies are registering, conducting feasibility studies, and drafting proposals, but major deals are yet to be landed. Though China’s central government often plays a role in helping secure market access, Chinese engagement in South Sudan is not monolithic. Private businesses and small-scale entrepreneurs are driving new investment as much as the state.

Some of Juba’s elite remain hesitant about putting too many eggs in one basket, and even those most eager to secure a major economic partnership argue there will be no Chinese monopoly. Beijing affirmed in January 2012 its intent to offer an economic package, including development grants and a possible billion-dollar infrastructure loan, and details are being negotiated. But new uncertainty over the future of Juba’s oil sector and continued North-South instability have altered the equation and may reduce the total offered in the end. Given the greater variety of financing opportunities now available to Beijing’s government “policy” banks and thus an increased sensitivity to risk, the scale of a loan may not match those extended to other resource-rich African states. Chinese companies will actively pursue contracts in any case, though most would prefer the loan financing that normally ties contracts to Chinese firms.

The budding bilateral relationship has strained of late, as Beijing has been drawn uncomfortably into the oil dispute between North and South. An African Union (AU) team, backed by the UN and other partners, continues to facilitate talks between the parties. Tense negotiations on security, borders, citizenship, financial arrangement and the export of oil have yet to yield concrete agreements and are complicated by ongoing conflict in Sudan’s border states. The impasse led to a shutdown of the oil sector in early 2012 that has imperilled both economies and prompted renewed war rhetoric. Most remaining oil is now in the South, but the predominantly Chinese-built infrastructure to exploit it – pipelines, refinery and export terminal – is in the North. Given comparatively modest proven reserves, oil imports, whether from North or South, no longer occupy the significant position in China’s global energy strategy they once did. But given the considerable investment in developing and operating the oil sector, the Sudans remain important for China National Petroleum Company (CNPC), the state-owned oil giant, and thus a focus for the government.

As negotiations toward a North-South oil deal foundered dangerously in late 2011, the role of China came centre stage, and many in the international community (and in the two Sudans) thought Beijing would be forced to intervene. Juba wanted help in pressuring Khartoum to cut a reasonable deal, and when the North began to confiscate Southern oil instead, it interpreted China’s inaction as passive complicity and moved to leverage its increasingly uncomfortable position.

At the same time, Chinese-led oil consortia were engaged in their own set of negotiations with Juba over the transition of oil contracts previously held by Khartoum. The financial terms were retained, but significant changes were made to strengthen previously neglected social, environmental, and employment standards. In light of the heated row with Khartoum, Juba also bargained hard to include measures that would bring oil company interests in line with its own and secure considerable legal rights and compensatory protections in the event of an oil-sector shutdown. It also secured discretion over the post-shutdown extension of contracts based on, among other things, companies’ cooperation in helping resolve the impasse with Khartoum. The interplay between the parallel negotiations added another dimension to China’s increasingly complicated position.

Both sides, as well as many international actors, assumed China would weigh in more assertively, though perceptions of Beijing’s influence and readiness to employ it were unrealistic. The shutdown of the oil fields, abduction of Chinese construction workers in Southern Kordofan and expulsion of the head of a Chinese-led oil consortium added to Beijing’s vexing political problem and generated anxiety among Chinese nationals in North and South. Both Sudans continue to try to pull China into their respective corners, but Beijing has resisted taking sides, as its principal objective remains balanced relations with North and South.

That said, many – including in Beijing – argue China can and should do more to ensure peaceful resolution, without compromising its interests or traditional adherence to a principle of non-interference. A recent shift in the North-South negotiation presents a possible new entry point for the international community, including opportunities for China to help break the deadlock, ease its own position and bolster stability within and between the two states. Beijing has shown signs of new engagement in recent weeks, but the comparatively weak domestic status and limited resources afforded to the foreign ministry must also be considered. China’s diplomatic capacity does not always reflect the powerful position the country enjoys on the world stage.

The oil impasse may temper the pace of Chinese engagement in the South but is unlikely to stall it. Angered by its sense that China still “treats it as a province rather than an independent state” Juba will continue to make demands, particularly with regard to management of its oil sector. But if managed pragmatically, the opportunities for mutual economic benefit should trump episodic tensions. China’s new expedition in the South and its attempt to balance relations with the two Sudans have proven tricky tasks, however, that will continue to challenge the boundaries of its foreign policy.

RECOMMENDATIONS

To the Government of South Sudan:

1. Manage relations with China so as to pursue legitimate near-term demands in the oil sector without endangering the broader political and economic relationship.

2. Articulate to Beijing a detailed set of priority projects for loan financing based on an assessment of current financial constraints, future debt burden, projected oil revenue and other donor commitments; harmonise the inputs and experience of Juba’s traditional development partners with the comparative advantages of Chinese entities in a way that best serves South Sudan’s development agenda.

3. Formalise an economic task force to consider the country’s investment strategy and partnerships and their effect on national development and foreign policy.

a) building on recent diplomatic efforts through more active and regular involvement in the North-South negotiations, including by directly engaging, via an empowered special envoy, the parties in support of African Union (AU) efforts to secure an agreement on the export of oil, as well as other outstanding political and security issues;

b) offering financial assistance to help cover a portion of Khartoum’s coming revenue gap, per the AU proposal, in combination with Juba’s proposed contribution and necessary austerity measures in the North. Given the need for considerable restructuring in Khartoum’s flawed economic model, such funds may best be administered in conjunction with an internationally-monitored program and guided toward smoothing the fiscal transition; promoting productive sectors beyond oil; and fostering greater economic decentralisation; and

c) recognising, given the interconnected nature of security between Sudan and South Sudan, that financial assistance alone will not yield a sustainable solution. Continued instability along the shared border and in Sudan’s marginalised peripheries will remain a threat to peace and to mutual economic viability, as well as to Chinese interests in both. Credible progress on these fronts must accompany financial assistance, or the money will be wasted.

6. Consolidate relations with Juba and protect the security of Chinese investments by ensuring Chinese companies in South Sudan exercise good business practices; place emphasis on areas that have hurt China’s reputation in the past, notably transparency, social and environmental considerations, local employment targets and quality delivery; and improve China’s standing by ensuring the benefits of commercial engagement and partnerships extend beyond government elites.

7. Extend a preferential loan package from the Chinese Export-Import (Exim) Bank – in coordination with other creditors – to support development of South Sudan’s infrastructure, so as to aid in opening up non-revenue sectors.